Cell phone payment system options multiply

Slow to catch on in U.S., trend gains momentum

By Karen J. Bannan

With nine out of 10 American adults owning a cell phone,
it's not surprising that a growing number of companies are creating payment
options that take advantage of the ubiquity of cell phones, some of which may make credit cards obsolete.

On May 17, DeviceFidelity released In2Pay, an iPhone case that holds a microchip enabling iPhone users to make payments by waving their phones in front of contactless payment terminals.

These companies aren't pulling the technology out of the
air, so to speak. While it remains avant-garde in the States, using
cellular phones to make purchases and transfer money to friends and creditors
has been business-as-usual in South America and Asia for a while. There, a
large proportion of unbanked consumers and the proliferation of cellular phones
have created an economy where someone might pay for a coffee -- or a refrigerator -- by waving a cell
phone close to a terminal or texting with a special code to have that purchase
put on a monthly cellular bill, bypassing any credit card
network.

"The rest of the world is kind of ahead of us in this area,"
explains Beth Robertson, director of payments research for Javelin Strategy
& Research. "There are a number of global markets where you can essentially
hold your phone near a device and authorize payment from your bank account or
cellular bill or do person-to-person payment by texting someone. Most of the
options take the credit card out of the equation."

Massive potential market
The mobile payments for digital and physical goods and
person-to-person payments worldwide will grow from $170 billion in 2010 to the
$630 billion mark by 2014, and about $100 billion of that will come from
offline purchases, according to a Juniper Research report.

The American market, however, is
different. According to a May 17, 2010, analysis by the Boston Federal Reserve Bank, mobile payment systems here have a chicken-and-egg problem: "... [Ccnsumers will not demand them until they know that enough merchants accept them, and merchants will not implement the technology until a critical mass of consumers justifies the cost of doing so," concludes the report.

Today, the majority of U.S. cell phone payment systems aren't designed
to eliminate the credit card from the equation. Instead, they augment them. For
example, Apple has an iPhone app called Bump that lets two iPhone
users tap their phones together to transfer cash from one credit card-funded
PayPal account to another.

Another company, Square, takes this paradigm one
step further by letting anyone with an iPhone or iPad accept credit card payments from Visa, MasterCard, American Express and Discover. The technology provider
asks people to download an app, which works in conjunction with a tiny credit
card reader that plugs into the phone's audio jack. Retailers can accept
Square, too, using the Apple device and photo identification. And all of the
major cellular phone manufacturers and cellular carriers are working on
built-in card readers or chips that will work across different cellular
networks, says Robertson.

No-card-needed systems
But more credit card-independent
offerings are launching. Xipwire, another new mobile payment system, also lets
people make retail purchases or do peer-to-peer transfers via texting. The
catch in a retail situation: the retailer has to be set up with a customized
Apple iPod Touch. The cashier texts the person making the purchase who in turn
replies with their personal security code. Another mobile company -- Think
Computer Corp. -- has introduced FaceCash, which uses barcode technology
to facilitate payments. Users hold their cell phone screen, which displays a
barcode and a photo ID, up to a barcode reader. Once authenticated, the
purchase is debited directly from a bank account.

Bling Nation is another example of the cell phone as a
payment device. Users who set up an account with the company get a BlingTag -- a
small, sticky microchip that attaches to any cellular phone. When they go to a
retailer that accepts the payment option, they tap the phone and the microchip
against a special reader. The money is withdrawn directly from the consumer's
bank account, and the cell phone owner gets a text message that functions as a digital
receipt. Bling Nation has been signing up financial institutions and retailers,
adding more monthly, says Meyer Malka, founder and co-chief executive officer
of the company.

Another company, Zong, forgoes the banking and credit card
systems completely, tapping Facebook's Credits system. Zong users can enter
their mobile number on websites to make payments. The sites then text the
person, sending them a code that is entered into the Web form. Charges
appear on the user's mobile phone bill.

[C]onsumers need to be educated
on this and get familiar with the mobile products.

--
Sandy Shen
Gartner Research

Credit cards may stick around
Still, it may be the credit card-linked model that has the
best chance of taking off, says Sandy Shen, a Gartner Research analyst. "From
the technical perspective, security is achievable and can be the same level as
people pay with credit card or bank transfer, but consumers need to be educated
on this and get familiar with the mobile products," Shen explains. "Most
payments will involve banks, so your purchase is not carried by your phone bills,
but on your credit card to ensure there is sufficient risk management in place."

Indeed, the hardest part with all of these mobile offerings,
says Scott Kveton, CEO of Urban Airship, is that, unlike the existing credit card
structure, which is worldwide, there is no common denominator for many of the
new players in the market. "The hardest part is how to hook all these multiple
cellular platforms together," he says. "There's no infrastructure in place,
which is why it's so hard. How do you support all the different handsets and
all the different networks and not have to charge the consumer a huge chunk to
make it happen?"

That's why
traditional credit and charge card vendors, which have been slow to announce new
products, may actually break out in the space -- and soon, says Javelin Strategy
& Research's Robertson. "All of the [credit and charge card] networks have
some sort of initiative in the area. MasterCard is putting MoneySend, a
peer-to-peer payment system in place in the U.S. market., Visa has many ongoing
global activities. Discover has trialed Discover Zip, a contactless card," she
says. "Mobile devices are gaining greater sophistication and functionality and
people love to use them, carrying with them at all times. It's not surprising
that we're seeing so much activity in this area."

Visa has
been running trials with Near Field Communications -- technology that lets the
user wave a cell phone near a contactless payment terminal. Visa's offering
will make use of a smart phone's MicroSD slot and software application called
Visa payWave, says Michele Janes, mobile maven and senior business leader in
the company's mobile initiative. "We're looking to leverage the payment system
that is in place today, but give people a new form factor," she says. "We know
consumers are looking for these options, and we're providing them something
that has the same security and protection that they're used to using their Visa
card." The company is also looking at text-based transaction offerings and
peer-to-peer payment options, says Janes.

In addition, Visa is working with DeviceFidelity,
a Richardson, Texas-based contactless technology firm, which on May 17 unveiled an iPhone special carrying case that
contains a payment chip that lets people wave an iPhone in front of a contactless payment device -- such as Visa's payWave.

How soon?So how soon
will Americans be emulating their Asian consumer counterparts and using cell
phones as payment options on a daily basis? It's hard to predict, says Jon
Swallen, senior vice president, research, at consulting firm Kantar Media North
America. "Technology trends often spread from East to West," he says.
"Generally, when we see these kinds of things beginning to emerge in the space
it's a precursor of something larger, so although we're at a very nascent stage
now, the expectation is, over time, mobile payment options will become a more
widely available payment system."

Updated: May 24, 2010

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